Question

The following costs result from the production and sale of 4,500 drum sets manufactured by Tight Drums Company for the year ended December 31, 2019. The drum sets sell for $300 each. The company has a 35% income tax rate.
Variable production costs
Plastic for casing $121,500
Wages of assembly workers 414,000
Drum stands 162,000
Variable selling costs
Sales commissions 112,500
Fixed manufacturing costs
Taxes on factory 15,000
Factory maintenance 30,000
Factory machinery depreciation 90,000
Fixed selling and administrative costs
Lease of equipment for sales staff 30,000
Accounting staff salaries 80,000
Administrative management salaries 160,000
Required:
1. Prepare a contribution margin income statement for the year.
2. Compute its contribution margin per unit and its contribution margin ratio.
3. For each dollar of sales, how much is left to cover fixed costs and contribute to operating income?

Answer 1

Answer:

Tight Drums Company

1. Contribution Margin Income Statement for the year ended December 31, 2019:

Sales Revenue                                                     $1,350,000

Variable production costs:

 Plastic for casing                  $121,500  

 Drum stands                          162,000

Wages of assembly workers  414,000

Total variable prodn. costs           $697,500

Variable selling costs :

Sales commissions                          112,500

Total variable costs                     $810,000             810,000

Contribution                                                          $540,000

Fixed manufacturing costs:

Taxes on factory                              15,000

Factory maintenance                      30,000

Factory machinery depreciation    90,000

Total Manufacturing overhead $135,000              135,000

Fixed selling and administrative costs :

Lease of equipment for sales staff         30,000

Accounting staff salaries                         80,000

Administrative management salaries   160,000

Total fixed selling and admin. costs $270,000    270,000

Operating Profit (Pre-Tax)  Income                       $135,000

Income Tax Expense (Rate = 35%)                           47,250

Net Income                                                             $87,750

2.Computation of Contribution Margin per unit and Contribution Margin Ratio:

a) Contribution Margin per unit

= Contribution Margin divided by Units sold

= $540,000/4,500

= $120 per unit

b) Contribution Margin Ratio

= Contribution per unit/Selling price * 100

= $120/$300 * 100

= 40%

3. For each dollar of sales, contribution per dollar

= 40% of $1

= $0.40

Explanation:

a) Data:

Sales = 4,500 drums

Selling price = $300 each

Sales Revenue = 4,500 x $300 = $1,350,000

Variable production costs:

 Plastic for casing                  $121,500  

 Drum stands                          162,000

Wages of assembly workers  414,000

Total variable prodn. costs $697,500

Variable selling costs :

Sales commissions                 112,500

Total variable costs            $810,000

Fixed manufacturing costs:

Taxes on factory                              15,000

Factory maintenance                      30,000

Factory machinery depreciation    90,000

Total Manufacturing overhead $135,000

Fixed selling and administrative costs :

Lease of equipment for sales staff         30,000

Accounting staff salaries                         80,000

Administrative management salaries   160,000

Total fixed selling and admin. costs $270,000

Income Tax Rate = 35%

b) Tight Drums Company's contribution margin income statement is a financial statement that separates all the variable costs from the fixed costs.  The difference between Tight Drums' Sales Revenue of $1,350,00 and the Total Variable Costs of $810,000 is called the Contribution Margin.

The Contribution margin of $540,000 shows how much of the sales revenue is left to cover the fixed costs totalling $405,000 and generate operating income, after deducting all the variable costs.

This contribution margin can be expressed per unit by dividing the contribution margin of $540,000 by the 4,500 units sold.  The per unit value can then be expressed as a ratio of the selling price.  From the contribution margin ratio, we can estimate how much is left per dollar of sales for Tight Drums Company to cover its fixed costs and generate operating income.